Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks

Applications

Now let’s look at some situations involving either a covered call trade or a spread trade. In a covered call trade, your short option is hedged by stock that you own. In a spread trade, your short option is hedged by a long option.

• Example 7. Covered call. You own 100 shares of XYZ stock, and you have sold one Nov 40 call for $2.50 per share. As long as the stock price is below $40, as in Example 1, you have no concern about early assignment. Even when the stock price is above $40, there is no concern if there is sufficient time value in the option price, as in Example 3. Only when the stock price is above $40 and the time value included in the option price falls to $.15 or less do you need to worry about an early assignment, as ...